Tax Executives Institute (TEI) has provided practical and insightful comments in response to UK’s Large Business Compliance Consultation by HMRC, which is far-reaching. A link to TEI’s comments is provided for reference:
The Consultation is focused on UK HQ companies, although the proposals also apply to non-UK based multinationals (MNE’s).
The underlying principle is unclear, especially for non-UK based MNE’s, and should be amended accordingly.
A separate UK tax strategy is an unrealistic expectation for most MNE’s, and will provide little relevance if enacted.
A UK Code of Practice is also unrealistic for MNE’s.
UK taxes, paid or accrued, generally bears little relevance to the global effective tax rate and is not relevant.
UK’s current tools of general anti-avoidance rules (GAAR), Senior Accounting Officer (SAO) tax framework, newly enacted Diverted Profits Tax, a Customer Relationship Manager (CRM) and other anti-abuse rules are already in place and would seem to remedy HMRC’s concerns.
Special measures are subjective and not subject to a formal independent panel for review prior to execution.
Board-level accountability may not be practical, while the SAO framework may accommodate this proposal.
Signing, or not signing, the Code of Practice should not be a trigger for public disclosure or risk assessment.
The Code of Practice includes determinations that transactions meet the intent of Parliament, an inherently subjective test that may be applied at will regardless of the law.
The tax transparency see-saw has now tilted to a dangerous level, in that transparency objectives no longer seem to meet the needs of tax authorities.
Information is being requested to satisfy presumed needs of the public and tax administrations, although similar efforts are not being made to have discussions with taxpayers to better understand tax risk and the relevant functions, assets and risks for which transfer pricing should be based in the relevant jurisdiction.
The UK proposal, and similar initiatives, may indeed erode the trust for which the tax authorities are seeking. It would be a novel concept to include the business community in discussions around these proposals prior to drafting, a welcome initiative that would better represent a win-win opportunity. Additionally, all audits should begin with a formal understanding of the transfer pricing practices of the MNE in that jurisdiction to focus tax queries accordingly and efficiently.
As the UK Diverted Profits Tax model has strayed from the OECD’s intent re: the BEPS Action Items, it has nonetheless been followed by other countries. This proposal may have a similar result, magnifying the concern of MNE’s and merits a detailed review by all MNE’s irrespective of UK business presence.
HMRC has published draft rules, entitled “Tackling aggressive tax planning,” to give effect to OECD’s BEPS Action 2 item, Neutralising the Effect of Hybrid Mismatch Arrangements.
The legislation will be effective as of 1/1/2017, preceded by this consultation paper, a summary of responses in summer 2015 and a second consultation on proposed draft legislation prior to its introduction in a future finance bill. Interested parties have until 11 February 2015 to provide comments for this consultation.
The draft legislation is envisioned to follow the OECD guidelines, and commentary, that are due to be completed by September 2015. A copy of the consultation paper is provided for reference:
The primary and defensive rules, as provided by the OECD BEPS Guidelines will be followed. The primary rule will be used to deny the payer’s deduction for a deduction/no income inclusion arrangement of a hybrid financial instrument or disregarded payment made by a hybrid entity, while the defensive rule would include taxing the income by the payee. For a double deduction arrangement of a deductible payment made to a hybrid entity, the deduction by the investor’s parent jurisdiction is denied using the primary rule, while the defensive rule would deny the payer deduction.
Rules will be considered to restrict the tax transparency of reverse hybrids.
The UK anti-arbitrage rules will not likely be retained.
The definition of an “arrangement” will not be the OECD version, as the existing UK definition would be used to achieve the same result.
Timing differences are not included, unless it appears that they will not unwind within a reasonable (5 years) time period.
The mismatch rules will apply for intra-UK and cross border situations.
For mismatches as a result of both a hybrid financial instrument and a hybrid entity, the hybrid financial instrument rule applies first.
Amended corporation tax returns and/or MAP procedures are permissible if the original mismatch no longer exists.
Tax treaties will not prevent the application of the recommended domestic laws to neutralise the effect of hybrid mismatch arrangements, thus no treaty amendments are necessary to apply the mismatch rules.
No grandfathering rules are envisioned, as the advance announcement of the UK rules will provide a transitional period to unwind structures.
The hybrid mismatch rules will operate within the UK’s self-assessment regime.
As stated in the Foreword of the consultation document, the UK’s strategy is to create the most competitive tax environment in the G20 and has led the way, driving the international tax, transparency and trade agenda forward.
The consultation paper is comprehensive, with numerous examples provided to illustrate, and visualize, the impact of the proposed rules. This proactive measure should be monitored to see how other countries follow the UK’s lead for taxing mismatch arrangements, including the timing and incorporation of the final guidelines by the OECD in 2015.